Brookings Survey on Eurozone Progress

Since 2010, developments in the eurozone have invariably been described as a "crisis," often with the assumption that the currency union would ultimately unravel. What this narrative misses, however, is the other important part of the story—how European leaders, at the same time as they are battling difficult economic conditions, are slowly building more solid foundations for the eurozone to make it a viable currency union.

It is that part of the story that the Brookings Survey on Eurozone Progress, meant to be updated quarterly, is tracking. While it is still possible that an accident will precipitate the collapse of the eurozone, the objective of this survey is to offer the best estimate, by Brookings scholars, of the progress made by European leaders in building a more solid and resilient currency union.

In our eyes, the goal for the eurozone must be to reach a point where the adjustment mechanisms within the monetary union are sufficient to handle periods of extreme stress, such as the current period. The balance can be achieved by minimizing the sources of stress, which usually relate to differences between the national economies, or by maximizing the ability to adjust to the stresses, or a combination.

There are multiple configurations of political, economic, and financial arrangements that would theoretically produce a sustainable system for adjustments to compensate for stresses. In other words, there are many possible roads to eurozone 2.0. Rather than choosing a path, we have drawn a list of six broad objectives where we think progress is needed in the coming years if the eurozone is to become self-sustaining and resilient: 1. creating a political union, 2. creating a fiscal union, 3. creating a banking union, 4. enhancing the role of the ECB in ensuring liquidity and market access, 5. creating sovereign crisis resolution tools, 6. improving competitiveness and economic adjustment.

We then asked 14 Brookings experts—American and European—to give us their best assessment of the degree of progress made by European leaders in reaching these six objectives. Some scholars have given their estimate for all six objectives, while others have focused on a few objectives only, depending on their areas of expertise. The scale runs from 0 to 100%, where 0% represents the least solid and resilient union consistent with the formal existence of such a union and 100% represents the ability to withstand the pressures of a severe, low-probability scenario with no more likelihood of a eurozone breakup than strong national governments face of their own unraveling. For more on the methodology, see the notes and methodology section (PDF). We offer the result as a range of expert opinions, recognizing the complexity of these issues and the subjectivity of the judgments.

In a nutshell: the inaugural survey results bring out three striking conclusions.

There is a clear consensus that the eurozone is a significant way toward viable long-term structures—the average assessment by scholars puts overall progress at 45%—but there is a long way to go.

The most progress so far is in central banking (67%) and sovereign debt crisis support (55%), and the least in deeper political union (37%).

There is fairly wide disparity among individual experts which is not surprising given the complexity and subjectivity of the analysis; assessments of overall progress range from 25% to 75%. Full explanations from the experts of their assessments are available in the "survey responses" section.

Survey Results:

Survey Responses:

Overall

QUESTION:

"On a scale from 0 to 100%, how far along do you estimate the eurozone to be in reforming itself in order to be a viable currency union in the long term?"

Nonresident Senior Fellow, Foreign Policy, Center on the United States and Europe

30

"In the end, the Euro stands or falls on structural reform and the Europeans are only 20% there, if that. Everything else is managing liquidity problems without dealing with underlying solvency issues. The best one can hope for from that is continuation of the unsatisfactory status quo. If survival of the Euro is the goal, I am modestly "optimistic" in the short-term and pessimistic in the long-term. If growth is the goal, I am pessimistic in the short-term and neutral in the longer-term."

"The eurozone has made significant progress in outlining a number of steps toward greater economic union as a necessary accompaniment to currency union. But in many respects, these steps—e.g. greater fiscal and banking union, support for the bond markets of trouble peripheral states engaged in reform—have yet to be implemented, in part because they are meeting resistance from countries both in the center and the periphery. Moreover, the sustainability, both politically and economically, of fiscal correction and the internal devaluation process to restore competitiveness in the periphery through austerity and recession is an open question as is the willingness of the center to provide support to the periphery to ameliorate the pain. Finally, the needed surrender of sovereignty of the individual countries to the collective will needs to be supported by governance reforms to enhance the democratic accountability of the collective and enable it to make decisions more readily."

"Important progress has been made in terms of announcing important policy innovations and a consensus on the way forward has finally emerged. However, credible implementation is key and, on that, there is still a very long way ahead of us.
"

"Europe has embarked upon the path but there is a long way to travel. It gets to 35% for wanting to succeed and taking important initial steps but to progress further the eurozone will need to show itself capable of changes that are very difficult politically.
"

Visiting Fellow, Global Economy and Development, Center on the United States and Europe

40

"Overall the institutional setting is very wanting. The lack of decisive countermeasures to the crisis is evident both in terms of financial resources aimed at staving off a short term emergency, and in terms of medium-long term institutional framework for more convergence and integration in the euro area. In fact the October EU Council has scaled down the objectives of the reforms for a more genuine economic and monetary union, while there is little doubt that the crisis is far from over. The strategy of stabilizing the fiscal position of the States while the private sector's deleveraging is still underway has backfired. The debt deflation spiral has now an own inertia that is becoming more difficult to reverse without economic coordination. The deterioration of the economy is having effect on political consensus for Europe, but the eurozone political response remains based on homogeneous binding and obligatory rules that leave no scope for real management of a non-homogeneous area. However, four times the final blow to the euro has already been averted in the last four years. So we should assume that, in case of a recrudescence, the political will to save the euro will be found and the ECB will step in again.
"

"Many of the basics exist for a stable eurozone, which has allowed the currency zone to avoid collapse so far despite the severe crisis. Much more would need to be done to ensure stability. Some of this has been promised, but not yet delivered, while other pieces are not even agreed upon in principle.
"

Director of Research, Center on the United States and Europe; Senior Fellow, Foreign Policy

40

"Markets and foreign governments now seem to believe that the Euro is here to stay and will reform itself. They are right, even though the eurozone has not yet reached a sufficient level of progress to be confident that it would survive renewed internal and external tensions, crises and shocks. Moreover, the appetite for reforms fades away as soon as confidence is restored, which puts the whole process into question. In this regard, the banking union will be a major test for European leaders. And while the ECB role is the uncontested bright spot of the process, the current deflationary debt spiral could imperil all these institutional efforts.
"

Nonresident Senior Fellow, Foreign Policy, Center on the United States and Europe

51

"The average of my assessments above is 51, that is just a bit inside the 50 to 75% bracket. With the meaning given to such bracket (confidence in the long term, but with risks), that broadly corresponds to my evaluation: we may be halfway through the reform process of the eurozone."

Nonresident Senior Fellow, Foreign Policy, Center on the United States and Europe

60

"I believe a eurozone will survive these current challenges, but it is still not clear whether it will survive in its present form. While this overall estimate is higher than probably one would arrive at from my sub-estimates, this is primarily due to the EU continually surprising me over the longer term with its ability to lurch forward when things look the most difficult and when the political costs of inaction are higher than the costs of increasing transfers or giving up more national sovereignty.
"

"The EMU is not an optimal currency area, this is not surprising, as you don't reveal pre-existing 'optimal currency areas' through a sudden and definitive political decision; optimal currency areas are the result of an endogenous process, this is at least what American history suggests and also one of the two competing academic positions in the debate of the 90's. So far, the EMU is an empirical confirmation of this proposition by proving its ability to resist the most severe and repeated financial shocks. Through continuous negotiations and rescue operations, members countries have confirmed the choice of the EMU: It took only two years for 17 governments to come to a shared understanding of the causes of the sovereign debt crisis and to a vision of the complex and multi-dimensional solution. The willingness to build a 'more perfect monetary union' has been sealed by the governments in their June 2012 summit with the adoption of the '4-President' Report; the ECB has offered ample time and ammunition to make this complex political process come to fruition. The process is moving forward; it can still face brutal shocks and will in any case rely on difficult and sometimes tense negotiations but the main dangers now could come from a depressed economic outlook making every choice more difficult or from complacency in a less pressing financial environment."

Creating a political union

QUESTION:

"In order to make the eurozone a viable currency union in the long term, European leaders need to make progress towards political union, both to strengthen its governance and remedy its executive deficit, and to ensure democratic accountability. On a scale from 0 to 100%, how far along do you estimate the eurozone to be in achieving the necessary level of political union to be consistent with a very resilient eurozone?"

"This is by far the area where the least progress has been made. Clearly, the crisis has highlighted the unsustainability between a highly-integrated monetary, financial, and economic area and its lack of a political union. This tension has now been acknowledged but little or nothing has been done."

Visiting Fellow, Global Economy and Development, Center on the United States and Europe

20

"Political integration is still determined by the will of national governments. Their resolve to delegate sovereignty is still to be tested. Until now national monopoly over the crisis has been the major cause of delay in the solution of the euro crisis. Each time that the crisis eases, national governments abstain from moving toward more integration. The political footprint remains the rule-based one adopted with the Maastricht Treaty at the light of expected convergence of the economies. It is hardly workable in the context of increasing divergences. Furthermore the blueprints for political union under discussion – as well as the Treaty (TFEU) - give only a very limited authority to the European Parliament that has until now not been able or willing to use its powers in order to change recommendations for euro area countries."

"Although a parliament is in place, most important decisions seem to be made among the leaders of a few countries and need to be adopted by all 17, only indirectly imperfectly and representing the views of the majority of the people of the eurozone. The executive in particular needs a better system of democratic accountability."

"The eurozone has decided that it wants to survive and will make a great effort to construct a viable union. This is very significant. But, it is not sufficient. State building is extremely difficult and we are very early in the process. Many roadblocks exist—technical, political, and external—which could derail the project, especially if a new crisis or accident occurs before it is completed."

"On the positive side, the structure of the EU, complemented by the ECB for the eurozone, provides the core for true political union. It has executive, legislative, and judicial arms with some considerable history and relatively smooth operations. On the negative side, national governments have deliberately kept the power of the European institutions fairly limited. Further, the Euro Crisis has shown that those European institutions can accomplish little at this point in their development without strong support by key national governments."

Nonresident Senior Fellow, Foreign Policy, Center on the United States and Europe

30

"I have problems with political union as a prerequisite of currency union. The yielding of fiscal sovereignty – a political act – is already taking place as far as the countries at risk are concerned. But a political union has implications that are permanent and extended to all eurozone countries. Moreover 'executive governance for the eurozone' may require some degree of external representation for the eurozone."

"Contrary to the national states where the sociological and national bonding is based on ethnicity and commonalities, the eurozone lacks such bonding materials apart from a common notion that we all belong to a Western civilization. The economic fabric could provide the basis for such a bonding to take place, however after the latest developments with the Euro crisis the inherent problems of this thinly united currency zone make it apparent that the political union is as of today a very distant vision."

Nonresident Senior Fellow, Foreign Policy, Center on the United States and Europe

40

"Institutions are very weak when it comes to accountability and robust governance. National level dynamics are still driving the discussions on eurozone crisis solutions. At the same time, European institutions continue to take a larger role in shaping the discussion and debate and are working to press the national players to make the necessary decisions to do just enough to keep the eurozone from collapsing and put changes in play for the medium term to strengthen resiliency."

Director of Research, Center on the United States and Europe; Senior Fellow, Foreign Policy

40

"The eurozone needs stronger and more accountable institutions, and does not have them yet. It cannot just be an ever-stricter surveillance society, and needs citizen control, otherwise public opinion in creditor countries will feel cheated and public opinion in debtor countries will feel abused. A common budget and a Treasury, as suggested by Herman von Rompuy, would also help stabilize things, inspire confidence, and provide common projects benefitting all Euro member states. Delineation of powers with the EU may prove complex, however, and lead to a two-tier system."

"The EMU was voluntarily created as a single currency without a state; it is not surprising that facing a major and unexpected crisis existing mechanisms proved insufficient. The striking fact is that many new institutional and political mechanisms have been arranged at short notice and proved immediately sufficiently robust to resist the immense threats culminating in the end of 2011. Decisions have been repeatedly submitted to popular votes that have frequently shaken incumbent governments but constantly confirmed Euro-oriented successors; clearly imperfect in this phase of transformation, accountability of decisions has been constantly checked under the existing democratic rules with particularly eloquent examples in Germany with the repeated agreements of the Bundestag to costly/risky rescue operations and at the other extreme in Ireland where the Irish people adopted the fiscal treaty by a 2/3 majority in a referendum. A high level of resilience has thus already been proven; it will nonetheless take time to arrive at a fully developed political union; first down payment within 2 years, achievement, 10 years."

Nonresident Senior Fellow, Foreign Policy, Center on the United States and Europe

90

"Political union, both in terms of vague executive power and especially in terms of democratic accountability, is a red herring. Most of the reforms that are necessary are national, not Brussels-based, and to the extent they are EU reforms, speaking vaguely about "political union" just clouds the issues. The issue of a "democratic deficit" is based on a fundamental misunderstanding about politics. Polling data shows clearly that in modern democracies, one policies are broadly "democratic," citizens do not favor, trust or like policies because they are more involved in their creation or because the institutions that generate them are more "participatory" (e.g. made by legislatures, referenda, or elected officials rather than courts, central banks, technocrats and executives). The question is whether the policy satisfies their preferences and the problem with the Euro is that currently it does not."

Creating a fiscal union

QUESTION:

"In order to make the eurozone a viable currency union in the long term, European leaders need to make progress towards fiscal union, an objective that includes fiscal convergence among national budgets, a regime of centralized surveillance and enforcement of budget rules, It could include, as well, two even more controversial features: mutualization of debt and fiscal transfers in the form of a common budget. On a scale from 0 to 100%, how far along do you estimate the eurozone to be in achieving the desirable level of fiscal union?"

Visiting Fellow, Global Economy and Development, Center on the United States and Europe

20

"The formal framework is in place, but it responds only to the principle of strict surveillance. There is no sign of fiscal coordination. Even fiscal surveillance has proven disappointing in its first application when the European Semester 2011 fell short from being convincing and was even later revised by national member states. The recent attempts to build a "fiscal capcity" for the eurozone seem to wither away, while, significantly, negotiations on the EU budget have shown the first attempts to reduce the common pool of resources.
"

"In this area, permanent structures are fairly sparse and the EU/eurozone have had to make do with ad hoc arrangements that have been cobbled together to deal with the Euro Crisis. Europe can deploy very considerable financial resources through the ESM and, even more so, through the ECB. However, there are not good decision-making structures and political agreement to use these smoothly, effectively, and pre-emptively. Further, there is only a small common European budget to assist with imbalances and few common debt instruments, most of which are structured for the specifics of their task, such as for the EFSF.
"

"Under the 'Fiscal Compact' 25 European economies have agreed on fiscal convergence and enforcement mechanisms, which are likely to become operative next year, once the treaty is ratified by at least twelve eurozone members.However, there is little advance in debt mutualization and common budget discussions. The content of the topics being discussed are well aligned with the objective of creating a stronger fiscal union, but significant political disagreements among eurozone members remain on these complex fiscal issues."

"A road map for convergence and enforecement has been established but not yet tested and implemented. True mutualization of debt will require democratic reforms to be sustainable. Responsibility for repaying debt must be accompanied by democratic responsibility for how it is incurred. "

"Europe has made some strides toward this objective although what shape it will take is still highly controversial. If successful, the end product is more likely to be a compromise that a pure adoption of the US or other models that could still be good enough. But politics could still get in the way.
"

Nonresident Senior Fellow, Foreign Policy, Center on the United States and Europe

35

"While taking some dramatic steps this year in adopting new measures for surveillance and accountability on the budget side, including more oversight and potential penalties by the European Court of Justice, it remains to be seen how effective these will be in practice. There have been some indirect steps toward mutualization of debt, but still insufficient to truly protect the eurozone. Fiscal imbalances among countries remain large and are likely to be the case for some time giving the widely disparate economic, political and cultural situations among countries.
"

"Progress has been achieved in terms of enhancing budgetary discipline through the Fiscal Compact treaty expected to come into effect shortly. But there is no credible roadmap wrt mutualization of debt and a central budget. The latter has now become even more important not only for the traditional purpose of enhancing cohesion and solidarity but also because lack of fiscal room deprives national economies of much-needed shock-absorber and insurance devices."

Director of Research, Center on the United States and Europe; Senior Fellow, Foreign Policy

40

"The string of reforms that have been adopted so far – the European semester, the "six pack" and then "two pack" measures, the fiscal compact – should not be discounted, as they go in the right direction. However, European leaders need to go even further in budgetary coordination and also take it to the next level by adopting a common budget for the eurozone (see above). Stealth debt mutualization has already happened through the ECB, the EFSF and potentially the ESM. At the same time, the eurozone is not going to become a full-fledged federation: states will retain some core functions which will make it necessary for them to retain taxing, spending and borrowing capacities, so the grading takes this into account."

Nonresident Senior Fellow, Foreign Policy, Center on the United States and Europe

55

"As rating agencies occasionally do, I would add the 'positive outlook' qualification to my assessment. Hence a figure just above the half way threshold. Possibly the coming mid-December European Council will provide a better evaluation (see van Rompuy's draft conclusions)."

"The fiscal union is not only a matter of technical details of a financial mechanism (i.e. centralization of budgets-enforcement and surveillance) but it is also a matter of balancing different financial, production and consumption dynamics within a common authority. Moving towards a fiscal union would only make sense if it would provide in some manner win-win situations for all participating countries. Otherwise a fiscal union that would be separated in layers of countries with different roles in the new economic matrix (lower wage Southern producers for the higher wage Northern consumers, or the equivalent of the NAFTA case) would be doomed to fail."

"To be more specific, I would assess Reinforced discipline at 90%, and Transfers at 50%. A fiscal union is a prerequisite to create trust and allow other progress but it is a multi-faceted target. The basics (centralized surveillance and stricter enforcement of budget rules) are an absolute necessity for 'well-managed' countries to make a deal with deficit-prone countries; they will happen within 2 years within existing or marginally modified political institutions. Fiscal transfers are of a different nature because they can only rely on broader and explicit democratic rules at the European level ('no taxation without representation'); a fully developed political union is thus a preliminary, the timetable is longer. The mutualization of debt is a more complex and itself a multi-faceted issue: for good reasons, it is presently not on the table of policy makers; thanks to existing proposals like the 'Redemption pact,' this issue could quickly surface at the political level in case of new severe shocks; otherwise it will be another product of the fully developed fiscal and political union."

Nonresident Senior Fellow, Foreign Policy, Center on the United States and Europe

80

"Micro-management of national budgets, except IMF style conditionality in deficit crisis situations, is not going to happen in Europe, and should not. National systems are too varied and there is no political support anyway. Broad constraints on budgets need to be credible at the domestic level, backed by market pressures, with international transparency. This already exists, and most of the discussion of further Commission oversight or cutting EU funds is just window dressing. This type of enforcement has never worked in the past and will not now."

Creating a banking union

QUESTION:

"In order to make the eurozone a viable currency union in the long term, European leaders need to make progress towards a banking union. The four features such a banking union should include, according to most analysts, are eurozone-wide: regulation, supervision, deposit guarantee fund, and bank resolution mechanism. On a scale from 0 to 100%, how far along do you estimate the eurozone to be in building a banking union?"

Visiting Fellow, Global Economy and Development, Center on the United States and Europe

10

"The current initiatives are still inspired by national political interests to control the local banks. The timeframe of the reform has been diluted and now we expect that the operational implementation of the reform will take place in the course of 2013. That does not imply necessarily that we will have a banking union soon after that. The principle according to which we are establishing a multitude of coexisting supervisors is deeply flawed. In my view it will put the basis of the next crisis. Separating clusters of banks along national borders means that as soon as one case of crisis will emerge, the credibility of the supervisor of the failing bank will be put in doubt. We will observe a flight of capital from the banks supervised by that supervisor toward other clusters of banks supervised by other supervisors. Deposits will flock away across borders especially because we are not establishing any form of common deposit insurance. So it will be a new explosive case replicating the dynamics of the government bond crisis."

"There is a fairly high degree of consistency in high-level banking regulation, thanks to common rules across the EU. The way in which supervisors implement those rules is much more varied and there is only a very weak European coordinating body for supervision, the EBA, which has been deliberately hobbled by the major national governments. Bank resolution is something of a shambles across Europe, with little commonality and incomplete structures in many countries. Deposit guarantee mechanisms have substantial consistency, but no sharing of the burden across national borders. The proposed moves to banking union would go a considerable distance to correct these issues, but there remain big areas of disagreement and a great deal to do in order to implement even those parts that are broadly agreed. There will be many devils in the details."

Director of Research, Center on the United States and Europe; Senior Fellow, Foreign Policy

20

"The European Council of December 13-14 is supposed to bring progress on banking union, especially on common supervision, but until now little concrete has happened. Even the current plans don't seem to do enough (in terms of common deposit insurance or a joint mechanism for bank resolution for example) to relax the deadly links between national states and their banks. Since the mismatch between huge financial institutions and small states was one of the origins of the crisis, progress here is critical."

"European governments have agreed on banking union as a goal but progress has been very uneven. For example, look at how the June 2012 declaration on banking debt was diluted in the fall of 2012. Deposit insurance remains very controversial."

"Once again, there's a roadmap, but it hasn't been implemented and there's resistance to zone-wide supervision, which must accompany zonewide guarantees and resolution. The issue of who is responsible for legacy bank loses is still unclear. "

"The policy discussions are focused on the European Commission's main proposal, to appoint the ECB as the central supervisor of all European banks. This represents a step forward towards a banking union. However, key elements remain to be defined, e.g. a single deposit guarantee scheme, a centralized banking resolution mechanism and the scope of ECB's bank supervision (will it include only big cross-border banks or also domestic banks?). The lack of definition in the latter areas also reflects substantial political disagreements among eurozone members."

Nonresident Senior Fellow, Foreign Policy, Center on the United States and Europe

50

"The crisis has prompted some significant new moves on the part of the EU, including the proposed banking union. While the details are still being hammered out it includes extensive supervision responsibility and the ability of the European Central Bank to support very directly the troubled banks in crisis countries (and implicitly back the deposits of banks). But there is a long way to go before one can conclude that this progress is sustainable and irreversible and the ECB balance sheet itself is very exposed now to bad debt and will increasingly be dependent on the Bundesbank for the perception of its strength."

Nonresident Senior Fellow, Foreign Policy, Center on the United States and Europe

60

"This is an important step, toward which Europeans are working. An important element in making the Euro viable, if that is the goal, would be to separate the fate of banks from the fate of sovereigns, and to render banking oversight more objective."

"The banking union is also a multifaceted issue with different timetables and challenges for governments. Regulation and supervision are low-hanging fruit despite the present inevitable turmoil in a high stake negotiation: they will happen quickly, no mystery given the existence and proven efficiency of the only real federal power in Europe: the ECB. A deposit guarantee fund is of a different nature; the goal can (for years) be attained on the basis of common rules and inter-agency agreements. Like fiscal transfers, a European-wide guarantee scheme is dependent of a full political union. Bank resolution is of an even higher difficulty and remains an open question at the global level.".

"The banking unification is more nearly inevitable that the other types of unification as result of: the common currency, the Basel 3 decisions that either way create some sort of uniformity for banking institutions and the toll that the financial crisis has taken on the banking system of the European South which necessitates a great deal of centralized support to prevent it from crumbling."

"It is a three step project. The correct order is banking union in the first place, fiscal union in the second, and finally the political union.
"

Enhancing ECB role in ensuring liquidity and market access

QUESTION:

"In order to make the eurozone a viable currency union in the long term, there needs to be an effective lender of last resort, almost certainly the ECB, for solvent banks, and to ensure the provision of liquidity for solvent but illiquid countries, so that they can address crises and reassure investors. This includes the possibility of ECB direct intervention in the bond markets. On a scale from 0 to 100%, how far along do you estimate the eurozone to be in acquiring these tools?"

"The ECB has made significant progress in increasing its role but doubts remain as to whether it is sustainable and credible. That said, there has been greater progress on this metric than in other areas."

"The ECB has significantly enhanced its role: first, by providing de facto unlimited refinancing operations to the euro-area banking system; and, most recently, by introducing the OMT program. The latter, however, remains untested and significant challenges may arise as a result of its activation. That said, it has to be acknowledged that its very introduction has been beneficial for the some large vulnerable sovereigns (ie Italy and Spain)—at least so far."

Visiting Fellow, Global Economy and Development, Center on the United States and Europe

60

"The ECB is helping correct the fragmentation of the credit and monetary market. However it is doing so following the wrong explanation of the crisis, i.e. that it is caused by less competitive countries needing plans of structural reforms. The narrative is an element of weakness of the ECB strategy because it could be an obstacle to the defense of the euro area as a whole due to market excesses or other reasons independent from the divergencies or sub-optimalities of single countries.
"

Nonresident Senior Fellow, Foreign Policy, Center on the United States and Europe

60

"This is an important step, toward which Europeans are working. An important element in making the Euro viable, if that is the goal, would be to separate the fate of banks from the fate of sovereigns, and to render banking oversight more objective.
"

"After Mario Draghi was appointed as a president, the ECB has made substantial progress towards acting as a lender of last resort for solvent banks and sovereigns.However, implementation uncertainties still remain, since the execution of the announced policies at a large scale has not yet been tested and might encounter political resistance on the part of non-peripheral eurozone countries.
"

Nonresident Senior Fellow, Foreign Policy, Center on the United States and Europe

65

"The surprise in all of this has been the strong role of the ECB in stepping up and backing governments and financial institutions in crisis. Without their strong intervention there would have been a financial collapse in Greece and likely other countries as well. While a conservative institution by nature, in the end they only exist for the Euro, so it makes sense that at the precipice they have taken the steps needed for survival.
"

"The ECB now provides massive amounts of liquidity to many eurozone banks and effectively serves as a lender of last resort to the banks in worst shape who have not been determined to be insolvent. The OMT program, following on the SMTP, effectively allows the ECB, in theory, to indirectly provide very high levels of liquidity to national governments. The reason I do not put the level at 100% is that we do not actually know how the OMT program will work in practice and how well coordination will work with national governments and European institutions. The formal framework for most of these operations remains only loosely founded in European law, which presents risks.
"

Director of Research, Center on the United States and Europe; Senior Fellow, Foreign Policy

70

"The ECB has started behaving like a normal central bank, and Mario Draghi's early September 2012 intervention was critical to turning a corner in the eurozone crisis. The provision of liquidity to the financial system in times of stress now seems to be a given, even though it is too early to be certain this will continue.
"

"The ECB was asked to play a key role in the Greek financial crisis and positively proved that it has the potential if not the will to create a stability pillar for the future. Whether it will actually form this pillar in the future, is a matter of political will from the eurozone countries."
"

Nonresident Senior Fellow, Foreign Policy, Center on the United States and Europe

80

"I am inclined to believe that the relative autonomy of the body and the personality of its president, as demonstrated by the ECB's September decision to print lots of euros with a German green light, converge with the markets pressure to suggest a daringly optimistic assessment."

"Economics teaches that a central bank is the lender of last resort to banks, not of governments; this is the rule of the ECB and it will not depart from this line even if other notions like 'rescuing illiquid countries' are in favor in other nations. Within its mandate, the ECB has been able to face the worst financial crisis since WWII, it has adopted huge unconventional measures to ensure liquidity and stability, it has fully exercised its responsibilities and declared itself to be ready to do whatever it takes to ensure the future of the Euro."

Creating sovereign crisis resolution tools

QUESTION:

"In order to make the eurozone a viable currency union in the long term, European leaders need to have emergency tools for aiding insolvent countries. These tools include official funding with conditionality and mechanisms to apportion losses when restructuration is needed. On a scale from 0 to 100%, how far along do you estimate the eurozone to be in acquiring these emergency tools?"

Visiting Fellow, Global Economy and Development, Center on the United States and Europe

30

"There has been a choice for establishing funds (Efsf and ESM) that have only very limited firepower. More straightforward solutions as eurobonds or ESM financing through the ECB have been denied. In the last EU Councils no serious attempt has been made to bring Eurobonds back on the agenda. On the contrary Chancellor Merkel complains about still existing elements of debt mutualization."

"The eurozone is generally capable of handling emergencies in small and mid size countries although there are doubts about the effectiveness of the strategies they pursue. It is still incapable of dealing with such scenarios in Italy."

"The ESM, the permanent euro-area rescue fund, has now become operational. Yet, the institution needs significant strengthening starting from its limited financial capacity and the excessive closeness to shareholders, especially its key ones.
"

Cesare Merlini

Title here

55

"I would also add a 'positive outlook' to my assessment. And also in this case the coming mid-December European Council may provide a better evaluation."

Nonresident Senior Fellow, Foreign Policy, Center on the United States and Europe

60

"In a very short period they have created some significant new tools to help the countries in crisis, protect the Euro, and share the cost. These have effectively kept several countries from collapsing and leaving the eurozone. However, the tools are still very inefficient and politically shaped. They are unlikely to be sufficient in their current form and we will see significant further evolution before the crisis is over."

"Europe now has an ad hoc set of institutional responses, and new institutions, that are available to fight sovereign debt crises. Now that the ECB has taken a more central fire-fighting role, Europe may have the full resources it needs – when there is the political will to use them. There needs to be a stronger institutional framework and greater pre-commitment before we can take anywhere near full comfort from this. In particular, concerns about "moral hazard" make it very difficult to know whether and when key support mechanisms will actually be used, especially in light of the potential for national vetoes."

Director of Research, Center on the United States and Europe; Senior Fellow, Foreign Policy

60

"First, the EU no-bailout clause was abandoned, which is important. Second, the EFSF and then the ESM, even if clearly undersized, have marked good progress, and a satisfactory arrangement has been found with the IMF. "

"The tools exist; the two major problems now facing European governments and institutions are 1. Confirming the trajectory of weak countries to restore solvency 2. Adapting the strategy in order to avoid recession and a deterioration of debt/GDP ratios despite austerity measures."

Nonresident Senior Fellow, Foreign Policy, Center on the United States and Europe

80

"This already exists, de facto. You cannot expect a centralized ex ante mechanism for this, since debt resolution issues like conditionality are always situation specific. One of the successes of the last three years is that the EU has moved ad hoc to create this type of IMF capability, even if it has come a bit late."

Improving competitiveness and economic adjustment

QUESTION:

"In order to make the eurozone a viable currency union in the long term, and avoid damaging disparities in competitiveness and economic conditions, European leaders need to improve internal adjustments mechanisms. That includes facilitating labor mobility, accommodating inflation differentials and promoting structural reforms in the countries where they are needed. On a scale from 0 to 100%, how far along do you estimate the eurozone to be in featuring these adjustment mechanisms? "

Visiting Fellow, Global Economy and Development, Center on the United States and Europe

20

"Competitiveness has been at the core of the rhetoric of the assistance programs of the troika. It is a different matter the macroeconomic surveillance in the context of the European semester. The EU Commission has to be handed back authority and independence from the pressure of national governments. A macroscopic deficiency has emerged relative to the current account surplus posted by Germany. This surplus should be urgently corrected but it is not even addressed in the recommendations to the countries. The same for structural reform in France, Italy and others.
"

"Competitiveness in the peripheral countries remains a major issue. Many have adopted plans for structural reforms but implementation has been mixed. Unit labor costs in some countries has fallen, but only under the pressure of deep and prolonged recessions—the lasting effects have yet to be proven and the economies of these countries are very depressed and show limited progress on breaking the austerity/depression loop, say through increased exports."

Nonresident Senior Fellow, Foreign Policy, Center on the United States and Europe

20

"In my view, this is the real issue. Political union, fiscal transfers, budgets and even banking are really side shows. Either European governments get their economies to converge fundmentally, creating a de facto optimal currency area, or they don't. If they don't, the only way to hold the Euro together is through deflation and depression in the deficit countries: a Japanese solution. Consider the case of Italy, which is too big to bail out and where neither budgets nor banking is the real issue; competitiveness is. (Nor is labor mobility or accommodating inflation differentials, which one cannot do in a monetary union.) Solving this problem means facing up to two challenges: (a) This requires domestic structural reform of labor markets, corporate governance, bank structure, the relation between tradable and non-sectors, service provision, education, national inflation, and much more. This is extremely difficult technically and politically. Since national systems are diverse, it cannot be done from Brussels. It is fundamentally national. (b) This must be symmetrical. German wage suppression is just as responsible for asymmetries and pressures in the Euro system as are Greek, Spanish and Italian profligacy. Without surplus countries adjusting, it is unlikely that the Euro is sustainable. The Europeans will tell you that all this is being done (see the recent Council report) but they are using statistics about a Southern Europe that is in depression. It's easy to show greater 'competitiveness', i.e. lower imports, higher exports, net balances, if you are not consuming and if you quash wages through high unemployment and low growth. But this is not a sustainable solution. It is hard to argue that a country like Italy has durably reformed post-Monti.
"

"Competitiveness adjustments have begun within the eurozone. However, to be meaningful, they need a facilitating monetary policy framework whereby the ECB (and Germany) are willing to accommodate a slightly higher, albeit stable, inflation rate at the euro-area level."

"The mechanisms of the European Union have helped considerably in creating a single market and easing the barriers to economic unity over previous decades. However, little has been accomplished at the European level in response to the Euro Crisis to move forward in this regard, despite a great deal of lip service to the idea."

Nonresident Senior Fellow, Foreign Policy, Center on the United States and Europe

35

"In the absence of the currency instrument, competitiveness can be reached thanks to administrative improvements and recession-driven reduced costs of production, but also thanks to prospects of growth. I doubt that the European Council will say something relevant in this second respect. I hope to be proved wrong."

"There have been adjustments and reform but three big problems remain: 1) where does the growth come from, 2) can the reforms be sustained if they are imposed amidst perpetual austerity, and 3) are the reforms sufficient."

Director of Research, Center on the United States and Europe; Senior Fellow, Foreign Policy

40

"Some progress has been made: structural reforms have been encouraged and implemented, especially in the Southern countries; labor mobility seems to have slightly increased, and Germany has increased salaries. However, there is still a long way to go in terms of improved competitiveness and structural reforms (in France among others), and if Germany tolerated a slightly higher rate of inflation, adjustment mechanisms would be easier and faster."

Nonresident Senior Fellow, Foreign Policy, Center on the United States and Europe

50

"The EU is a dramatic example of success in developing a common economic market and I don't want to understate the enormous achievement. At the same time, the national differences are still significant and the structural reforms are not taking place at a pace to alleviate a worsening problem. The economic reforms in most crisis countries are still primarily fiscal in nature, creating effectively one-time downward shifts in labor costs, but lacking in more significant structural reforms to the business environments and in the relationships with the political spheres. Add to this challenges like immigration flows and the tensions it has caused on internal borders and one can envision serious new problems arising that may offset gains from further fiscal harmonization, economic transfers, and development of EU institutions."

"This is a very difficult issue for democratic governments because it constantly involves unpopular measures, whatever their exact content (think of Jean-Claude Junckers's well-known remark 'We all know what to do; what we don't know is how to do it and then get reelected'). This said, one should not underestimate either what has already been achieved in the Southern countries nor the evolution of minds in Germany where the idea that the country has enormously benefited from the Euro is present if not dominant. France remains a case of its own."

"While in the past decades and through tools such as the Integrated Mediterranean programs and the Delors support packages there was a move towards eliminating economic disparities, the bold action of promoting structural reforms through a centralized mechanism is yet to come."

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